A Classical Market Analysis of Bitcoin Using Porter's Five Forces
The surge of Bitcoin value has caused a global frenzy of investing in, and mining of, Bitcoin. Fortune even published an article about the growing phenomenon of people mortgaging their homes to invest in Bitcoin. It is eerily similar to stories in the late 90s where people were quitting their jobs and mortgaging their homes to invest in Internet stocks--and that did not turnout all sunshine and daisies.
And, similar to Internet stocks, I think there's going to be a few winners and a whole lot of losers when it comes to cryptocurrency.
Bitcoin was ingeniously designed to provide privacy, security and scarcity of its currency. It's value is largely derived from those three attributes. One additional--and currently most significant--source of its value is the brand equity/publicity Bitcoin enjoys as a rapidly appreciating investment. So, what could go wrong?
In a classical marketing context, I would look at Porter's five forces of profitability to try and determine the long term value of Bitcoin. Here goes:
Threat of Substitutes, Threat of New Entrants, Competitive Rivalry: The notoriety of Bitcoin is attracting legions of potential substitutes. From software companies to banks, everyone is getting into the act. Bitcoin is, by far, the leader in the space. While it has brilliantly managed its own scarcity, Bitcoin can't manage the scarcity of currency in general. Plus, at the end of the day, software companies, banks and governments can back their currencies with assets. Bitcoin is backed only by goodwill. And, when the fever dies down, users of currency may want some harder guarantees than Bitcoin can provide.
Bargaining Power of Customers: For the reasons stated above, users of currency are going to have A LOT of options available to them. And when it comes to use of currency (rather than investing in it), the Bitcoin value proposition is not that strong unless you are trying to avoid detection of your transactions by the government.
Bargaining Power of Suppliers: So, who are the suppliers to Bitcoin and other currencies? Well, there's a lot of them. You have the miners of Bitcoin. You also have merchants who are willing to accept Bitcoin or another currency as payment. And both of these groups are likely to stumble into some stiff government regulation pretty soon. Here are just a few of the reasons:
- Due to the high degree of privacy it provides, Bitcoin is often used for illegal purchases like drugs, fake IDs, prostitution and more. There is also speculation that it will become the currency of choice for terrorist organizations. Being able to promote security and enforce laws requires that Bitcoin transactions provide a higher degree of transparency to governments than currently exists.
- Trading of Bitcoin is generating lots of income. Income which governments want/need to tax.
- Governments derive a large source of their power from the ability to produce and regulate currency. Bitcoin is a threat to that power.
- Bitcoin mining is an ecological disaster soon requiring more electricity than what's consumed by the United States.
As part of this, governments (particularly corrupt ones) are in a unique position to manipulate the value of Bitcoin. Take a short position on Bitcoin, then shut down or suspend Bitcoin acceptance in your country, and cash in.
And, as Bitcoin becomes a regulated currency it loses a lot of the attributes (namely, privacy) that attract people to it.
Short term, I hope everyone makes a lot of money on Bitcoin. Long-term, you probably need to find another investment.